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by geoffschmidt
5076 days ago
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Chris is not talking about this. He's talking about venture capital, where (1) you typically need to raise at least $2M (otherwise the firm can't justify the board seat), (2) the money for the investment came from a venture fund that was raised from limited partners, and the fund's lifecycle is structured such that the investments need to see liquidity within 5-10 years. As for angel investors, the angel deals you hear about on HN and TechCrunch work differently from what you're talking about. They don't buy common stock and they wouldn't receive dividends even if you paid them. Instead the angels receive a debt instrument that turns into series A preferred stock once you raise venture capital. If you fail to raise venture capital, the angel writes off the investment as bad debt and walks away. Historically these deals wouldn't even fix a value on the company, though the conversion caps that are now in vogue are effectively valuations. One reason it's done this way is that just the legal fees for issuing series A preferred stock easily run to $50-75k. That money is spent drafting the protective provisions that make the stock "series A preferred" rather than "common". Another is that, historically, angels have found that the big wins are so big that they make the rest of the portfolio irrelevant. So sure, if you can find an angel that will buy $250k of common stock in a tech company that has no chance of a big upside, go for it, but I think you're going to be looking for a long time. Of course you're right that many businesses are financed through small common stock deals, but these are more often small businesses like your local restaurant or auto mechanic, where the business model is well understood but there is no chance for this 10x return on capital you mentioned, and the money usually comes from friends and family, not from professional investors. |
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